Third Quarter Cannabis Financing Shows Preference for Debt

November 17, 2021 - SLB Capital Advisors provided insights regarding recent financing trends including sale leaseback financing in the Cannabis space

  • SLB Capital Advisors’ principal Dave Rosenberg shared insights regarding recent financing trends in the Cannabis space, including sale leasebacks
  • “The financing constraints that many cannabis operators face are a familiar story. Much revolves around impediments from lack of legalization at the federal level; however, other traditional drivers play a role as well, including industry and business life cycles. In recent months, the convergence of a number of factors, including increasing amount of capital providers, stronger credits and a low interest rate environment, has resulted in an emergence of debt financings and, in some cases, lower borrowing costs for operators.”
  • “What we may have witnessed over the last few quarters is the surfacing of latent underlying demand for debt financing solutions in an industry handcuffed for capital solutions. The convergence of capital providers, stronger credits and a low interest rate environment has resulted in an emergence of these debt financings.”
  • “Sale-leasebacks comprise a small but material portion of the capital stack, ranging from 20% of deals (Q1 20 20) to most recently 7.5% (Q2 2021). As cannabis providers grow, become cash flow positive and increase in scale, we expect sale-leaseback financing to comprise a material portion of financing.”
  • “Cap rates in the cannabis space have compressed significantly—while pricing is considered wide as compared to other sectors, given the capital constrained nature of the industry, a sale-leaseback can still be considered a relatively attractive financing alternative.”
  • “The federal status of cannabis has put a kink in the traditional decision-making process and industry tax intricacies can provide further complications. Any operator seeking to optimize their long-term capital structure should consider all elements including overall cost of capital, tax implications, flexibility and dilution. Equity, debt and sale-leasebacks all offer various advantages, though the decision may be dictated by both company life cycle and industry nuances.”